Cash-flow is king. Abiding by that philosophy, Inca One Resources (TSX-V: IO) is a company that has transformed itself, in the past months, from just another struggling junior explorer to a cashed-up gold refiner with near-term profits in sight.

The company bought Chala One, a 25-tonne-per-day processing plant in southern Peru, in June 2013, signaling a major shift for the company. Inca One’s new strategy was to move away from the exploration model towards capitalizing on recent changes in the informal mining sector in Peru. By making itself into a gold ore-processing business, the company set a goal of becoming the go-to gold processor for informal miners in Peru.

Inca One is hoping to take advantage of President Ollanta Humala’s recently announced push to modernize the informal mining sector in the country. Currently an estimated 20% of Peru’s gold production, worth an estimated $2.6 billion, comes from the thousands of unregulated or unorganized small-scale miners in the country. Most of that gold gets exported untaxed, while the production and refining of the gold at the informal level often involves excessive environmental damage and toxic contamination for artisanal miners from the use of mercury.

Humala is trying to address all of that by formalizing the sector, requiring all miners to register and adhere to a number of rules and regulations. One of the new rules is that the miners will have to process all their material at a recognized and permitted mill facility, which is where Inca One and its Chala One gold processing plant come in.

After acquiring Chala One last June Inca One wasted no time in bringing the plant up to the newly prescribed standards and getting the right approvals so that Chala One could be a destination of choice for informal miners in the area.

By November Inca One recorded its first gold pour, with 62.36 oz. gold recovered from the first 97 tons of throughput at an average head grade of 22.26 g/t gold and an average recovery of 90.72% was achieved. For December to February the company recovered 172.36 oz gold and 78.58 oz silver from 365 tonnes.

With capacity at only 25 tpd Inca One is currently limited in its production, but the company has already started work on expanding to 50 tpd, and is permitted to size up to as much as 350 tpd. In early February the company started plans and construction on a new ball mill and tailings pond upgrade to prepare for the expansion.

The company has also added an onsite metallurgical laboratory, allowing it to test moisture content, particle size, and reagent consumption as it works to tweak the mill’s operations.

And while Inca One is working to upgrade capacity to 50 tpd, it already has its sights on doubling that, with a goal of reaching 100 tpd by Q4, 2014.

Funding has been the big barrier to expansion and very difficult for most companies in this sector. But Inca One recently secured $5.5 million in debt financing to make sure the growth plans go ahead. The debt financing is quite favorable as it avoids having to dilute shareholders significantly. It comes with a 10% interest rate and the deal also opens the possibility of $15 million in more debt or equity financing later on to grow the company even further.

Of course the key question for Inca One’s plans is just how much money can it make with its toll-mining model. Currently, the company is still in the early days, but the processing terms give Inca One at least a $250 per ton operating margin as long as the ore grade is over 0.8 oz. per ton. At 100 tpd Inca One expects to achieve an $8 million per year initial net cash flow rate.

Roughly $250 profit per ton looks about right, as that is what Dynacor Gold Mines, a more established ore processor, has been achieving, and what Inca One looks to as a benchmark.

It is no small coincidence that Inca One uses Dynacor as an example, as the company is doing exactly what Inca One aspires to, and provides a glimpse of what is possible.

Dynacor had net earnings of US$9.1 million in 2013 on 76,883 oz. produced with an average grade of 1.04 oz. per tonne. Over the last three years prior to 2013, the company has averaged a gross profit of US$265 per oz. on its gold, with an average grade of 0.88 oz. per tonne.

But while Dynacor proves the model works and that Inca One could well make a very real profit, it is also a competitor. Dynacor is working to open a processing facility of its own in the Chala region of Peru, with an initial 300-tpd capacity and room to increase that to 600 tpd. But considering the size of the informal sector, both operators should well thrive in the region.

For now, finding enough ore to feed its mill is certainly not Inca One’s biggest challenge, instead its biggest challenge is the same faced by all juniors – finding enough capital. With the $5.5M debt financing just announced, Inca One now has moved past its biggest challenge and can now focus on growing Chala by 400%.

But unlike many juniors, the company is at least working towards near-term profits. Prior to the debt-financing, to continue moving forward, the company has resorted to some creative financing options, all with the intention of raising enough money to carry it through until it starts making money.

In early November Inca One entered into a deal with Global Resources Investments to indirectly raise money on the London Stock Exchange. Inca One agreed to issue 10 million shares at 12¢ each to Global, with Global in turn agreeing to give Inca 716,589 shares of Global Resources Investment Trust. Inca One would then get it’s $1.2 million by selling GRIT shares after GRIT lists on the London Stock Exchange.

In late January this was amended so that Inca One will issue 12 million shares at 11¢ each for $1.32 million in gross proceeds. GRIT will issue Inca One 733,000 shares at £1.00 per share, which Inca One will be able to sell on the LSE.The deal is unusual, but not entirely uncommon as we have observed many other juniors that have entered into similar GRIT financings in the past months. When the deal does come through it will provide Inca One with additional funding and provides additional cash to the debt-financing.

With its various financings, minus the costs of getting Chala One up and running, Inca One was left with about $400,000 in cash as of March 7. The completed financings also left the company with 63.5 million shares, 10.1 million warrants, and 3.9 million options outstanding, with management heavily invested, owning 17.5% of the shares.

That management includes a mix of new and old in the mining world. The company is headed by Edward Kelly as President and CEO, with more than 20 years of experience in sales, marketing and business development work, who describes himself as a “turn-around specialist who has rescued several private ventures.”

In mid-October the company appointed George Moen as Chief Operating Officer to help drive the company forward. While Moen doesn’t have any mining experience, he does have a lot of enterprise experience and expanding operations. Moen has served as president of the Blenz Coffee chain, bringing it to over 100 locations worldwide. Having vast knowledge of the franchise business model, he is the co-founder of many businesses, including Sandwich Tree, Steamrollers, Rapid Time Networks and High Output Business Networking. Hisexpertise in rapidly expanding business models applies well to Inca One’s mission to rapidly expand milling and mining operations through ore processing.

Bringing more technical mining expertise, Thomas Henricksen is a director and the company’s chief geologist in Peru with more than 30 years of mineral exploration experience. He is the former chief geologist for Norsemont Mining.

At the end of October the company also brought on George S. Young as an advisor. Young has more than 35 years in the industry, including time as president of MAG Silver, VP and director of International Royalty Corp, and general counsel of Bond International Gold.

Looking forward, the team has some ambitious goals ahead of themselves. Inca One wants to find at least two more plants and bring those up to 100 tpd as well, for 300 tpd in total capacity in the midterm. For that it will have to raise some $15 million in debt/equity financing. And within five years it wants to acquire even more plants and bring total production capacity to over 1,000 tpd and become the “processor of choice” for Peruvian miners.

The company has a good start towards its goal of becoming a profitable processor in Peru. Having progressed to the first 25 tpd stage, the company is up and running and already working to double that to 50 tpd and further to 100 tpd by the fiscal year end April 2015. There are a lot of upside opportunities to grow gold ore processing operations in the country and by keeping focused on cash flow, I can see Inca One potentially growing into a very profitable operator.

Their low-risk business model is proven and a very appealing one from both an economic and social perspective. It is a win-win prospect for the miners and the ore processor. Once the debt-financing is completed, positive cash flow has begun and capital risks have been mitigated, the company will be seeing more favorable valuations.

At a current market capitalization of around $8M with growing gold milling, Inca One looks to be a good mid to long-term investment. Once running at 100 tpd, Inca One will be looking at a positive cash flow of upwards of $10M, more than the current market cap! Compare that to Dynacor for example, Inca One is trading at a fraction (~1/3) of relative valuations.

As Inca One meets its milestones, the $5.5M debt-financing was a big one, the company should continue to be revalued by the market. Some of the next big milestones are gold processing expansion to 50 tpd and then to 100 tpd. The resulting positive cash flow will continue to lower risks and revalue the company appropriately, as will any further cash added to the balance sheet such as the $1.32M in GRIT shares or from stock warrants.

I have been accumulating a large investment position at current levels and looking for 2014 to be a very exciting development and growth year for this new junior Peruvian gold processor. In a gold market where cash is king, Inca One is heading on the right track to turn itself into a cash flow generator with a business model that has room for a lot of upside growth!

Peter Spina's experience with the precious metal markets started back in the mid-1990s, which led to the creation of GoldSeek.com back in 1995. Today GoldSeek.com ranks in the top three most popular global gold websites and its sister site, SilverSeek.com ranks as the most visited silver website in the world. Back at the start of the new secular precious metals bull market, Peter established the technically-focused subscription newsletter, which at the start of 2005 was merged into the more comprehensive Gold Forecaster (goldforecaster.com) service. In addition to the newsletter and websites, Peter frequently appears in the media including MarketWatch, Reuters, and Investors Business Daily.

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Peter Spina's experience with the precious metal markets started back in the mid-1990s, which led to the creation of GoldSeek.com back in 1995. Today GoldSeek.com ranks in the top three most popular global gold websites and its sister site, SilverSeek.com ranks as the most visited silver website in the world. Back at the start of the new secular precious metals bull market, Peter established the technically-focused subscription newsletter, Gold Seeker Report, which at the start of 2005 was merged into the more comprehensive Gold Forecaster (goldforecaster.com) service. In addition to the newsletter and websites, Peter frequently appears in the media including MarketWatch, Reuters, and theStreet.com

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